Early Street Reactions Are In: How'd IBM Do?

In a report published Tuesday, analysts at Morgan Stanley maintained their Equal-Weight rating on International Business Machines Corp.

.The price target has been raised from $159 to $160. The company reported stabilized constant currency revenue growth, driven by the z13 mainframe cycle, which is expected to prove to be a tailwind for most of 2015. FCF and profit fundamentals, however, continued to be challenged due to IBM's investments to ensure long-term growth. The z13 mainframe cycle helped mitigate the flat ex-divestiture and constant currency revenue growth, growing 130 percent, year on year, in constant currency. Despite the unusually weak Q1 seasonality, the company reported growth in gross margins of more than 10 points, as well as pre-tax profit for its Hardware segment. "While 2Q will represent the first full quarter of the mainframe cycle, tougher year on year comps will likely push growth into the +20-30% range," the analysts said. IBM reported its Q1 EPS above its guidance and the street consensus, driven by a marginal improvement in software growth and better-than-seasonal hardware profits. "We look for EPS growth to improve by 4Q when easier comps, restructuring savings, services backlog revenue conversion begin to kick-in," the analysts added. While the company reiterated its guidance of flat FCF for 2015, Morgan Stanley expects FCF to be back-end loaded during the year.